"Outperform 99% Of Investors With This Simple Strategy..." - Peter Lynch
Summary
TLDRIn this insightful interview, Peter Lynch, acclaimed as America's top money manager, discusses his philosophy on investing in stocks. He emphasizes the importance of understanding one's natural advantages and the value of investing in industries one is familiar with. Lynch provides practical advice from his book 'One Up on Wall Street', illustrating how everyday observations can lead to profitable investments. He also shares his thoughts on the unpredictability of economic factors and the benefits of a hands-on approach to investing, as demonstrated by a successful seventh-grade class and investment clubs. The conversation concludes with Lynch's personal transition from managing funds to focusing on family and charitable work.
Takeaways
- 📈 Peter Lynch emphasizes the importance of individual investors understanding their natural advantages in the stock market and encourages them to invest based on their own knowledge and experience.
- 📚 Lynch's book 'One Up on Wall Street' was written to help people realize their potential in the stock market and to invest in a way that aligns with their personal understanding of companies and industries.
- 😔 Despite the best decade for stocks in the 1980s, many people lost money due to flawed investment methods, which motivated Lynch to write another book to provide better guidance.
- 🤔 Lynch advises that if investors do not understand a company well enough to explain it simply to a 10-year-old, they should not invest in it, as they won't know how to react when the stock price fluctuates.
- 🏢 The transcript highlights the idea that people should invest in what they know, such as their own industry, to make informed decisions and avoid unnecessary risks.
- 💡 Lynch shares personal anecdotes, like his wife's enthusiasm for a product leading him to recognize its potential, as an example of how personal experiences can inform investment choices.
- 📉 He discusses the correlation between a company's earnings and its stock performance over time, suggesting that external factors like politics and economics are less important than a company's fundamentals.
- 🧩 Lynch mentions that even investment clubs, composed of amateurs, outperformed professional investors in the 1980s, illustrating the potential for non-professionals to succeed in the market.
- 👨👩👧👦 After stepping down from managing funds, Lynch chose to spend more time with his family and engage in charitable work, showing a shift in priorities from professional success to personal fulfillment.
- 🏛️ Lynch's involvement in charity work includes being on investment committees for institutions like the Museum of Fine Arts, demonstrating his continued interest in leveraging his financial expertise for social good.
- 📊 The transcript also provides examples of Lynch's investment philosophy in action, such as his investment in Dunkin' Donuts, based on understanding the company's business model and potential for growth.
Q & A
Who is Peter Lynch and what is his significance in the financial sector?
-Peter Lynch is a renowned money manager, known as America's number one money manager by Time Magazine. He is famous for his successful management of the Fidelity Magellan Fund, which was a top-ranked general equity mutual fund during his tenure.
What was the purpose of Peter Lynch writing 'One Up on Wall Street' and then 'Beating the Street'?
-Peter Lynch wrote 'One Up on Wall Street' to explain the advantages individuals have in investing in stocks and to encourage people to get involved in the stock market. He wrote 'Beating the Street' to further emphasize the importance of understanding the fundamentals of a company before investing and to provide advice on maximizing profits.
According to the transcript, what percentage of people's financial assets were in stocks and mutual funds in 1960, and how has this percentage changed since then?
-In 1960, people had 40% of their financial assets, including their house, in stocks and mutual funds. This percentage decreased to 25% in the 1980s and further dropped to 17% in the time period being discussed.
Why does Peter Lynch believe that people lost money in the 1980s, which he considers the best decade for stocks?
-Peter Lynch believes that people lost money in the 1980s because their methods of investing were flawed. They did not understand the fundamentals of the companies they were investing in, leading to poor investment decisions.
What is the main philosophy that Peter Lynch advocates for when it comes to investing in stocks?
-Peter Lynch's main philosophy is to invest in what you know and understand. He suggests that if you can't explain a company's business to a 10-year-old in two minutes or less, you shouldn't invest in it.
How does Peter Lynch relate the story of his wife and her hosiery purchase to the concept of investing in what you know?
-Peter Lynch uses the story of his wife's enthusiasm for a particular brand of hosiery to illustrate the idea of investing in what you know. His wife's positive experience with the product led him to believe in its quality and potential for success, which is a similar rationale one should use when choosing stocks.
What is Peter Lynch's view on the correlation between a company's earnings and its stock performance over time?
-Peter Lynch believes there is a 100% correlation between a company's earnings over several years and its stock performance. He asserts that if a company like McDonald's does well, its stock will also do well, regardless of external economic factors.
Why does Peter Lynch discourage investors from trying to predict interest rates or the economy?
-Peter Lynch discourages this because even experts like Alan Greenspan, the head of the Federal Reserve, cannot accurately predict interest rates or the economy. Therefore, investors should focus on what they can understand and control, such as a company's fundamentals.
What advice does Peter Lynch give to investors who are not involved in a specific industry?
-Peter Lynch advises such investors to buy local companies or stocks they are familiar with. He uses the example of Walmart, suggesting that investors could have made significant profits by investing in companies they understand and that are part of their local economy.
What is the significance of the seventh-grade class example mentioned in the transcript?
-The seventh-grade class example demonstrates that even young students can successfully pick stocks when they understand the companies they are investing in. The students' stocks outperformed the market, showing the effectiveness of Lynch's investment philosophy.
What changes did Peter Lynch make in his life after managing the Fidelity Magellan Fund for 13 years?
-After managing the Fidelity Magellan Fund, Peter Lynch decided to spend more time with his family and engage in charitable activities. He reduced his work hours and became involved in hands-on charity work, such as helping with inner-city schools, libraries, and housing.
Outlines
📈 Stock Investing Misconceptions and Peter Lynch's Philosophy
In this paragraph, the speaker discusses the common misconceptions about stock investing, emphasizing that people often fail to recognize and utilize their natural advantages. Peter Lynch, renowned as America's top money manager, introduces his book 'Beating the Street,' which aims to guide individuals on stock selection and profit maximization. He highlights the importance of understanding one's industry and the company's earnings as key to successful investing, rather than being swayed by external economic factors. Lynch also shares anecdotes from his personal life to illustrate the concept of investing in what one knows and understands, advocating for a simple yet effective approach to stock picking.
💼 The Pitfalls of Short-Term Stock Trading and the Importance of Knowledge
This paragraph focuses on the pitfalls of short-term stock trading and the importance of understanding the companies one invests in. The speaker criticizes the approach of treating stock investments as gambles, which often leads to loss of money due to high transaction fees and poor decision-making. He advises that if one cannot explain a company's business to a 10-year-old in two minutes, they should not invest in it. The speaker shares examples of successful investments in well-known companies like Walmart, illustrating the potential for significant returns when investing in familiar industries. He also discusses his own future plans post his book release, emphasizing his desire to spend more time with his family and engage in charitable work, while still maintaining a connection to the investment world through mentoring young analysts.
🤝 Peter Lynch's Involvement in Philanthropy and Community Development
In the final paragraph, the speaker elaborates on his post-retirement activities, particularly his involvement in philanthropy. He mentions his work on the investment committees of various organizations, such as the Museum of Fine Arts, and his hands-on participation in charitable activities aimed at improving inner-city schools, libraries, and housing. This paragraph underscores Lynch's commitment to giving back to the community and using his expertise to make a positive impact beyond the financial sector.
Mindmap
Keywords
💡Natural Advantages
💡Stocks
💡Peter Lynch
💡Mutual Funds
💡Investment Clubs
💡Earnings
💡McDonald's
💡Recession
💡Dunkin' Donuts
💡Walmart
💡Charitable Activities
Highlights
People often fail to recognize and utilize their natural advantages in investing.
Peter Lynch emphasizes the importance of investing in what you know and understand.
Lynch's first book aimed to encourage people to get involved in stocks based on their personal advantages.
Despite the decline in stock investments, Lynch believes in the long-term benefits of stocks.
Lynch discusses the flawed methods that led to people losing money in the stock market during the 1980s.
The correlation between a company's earnings and its stock performance over time is often misunderstood.
Lynch argues that external factors like the economy or interest rates are less predictable and should not be the focus of stock investment decisions.
Investors should avoid stocks they do not understand, as it leads to poor decision-making when the stock price drops.
Lynch shares personal anecdotes, such as his wife's enthusiasm for a product leading to a successful investment.
Investment clubs, made up of amateurs, outperformed professional investors in the 1980s.
Lynch's new book, 'Beating the Street', offers advice on stock picking and profit maximization, building on the principles from his previous book.
The importance of staying within one's industry when investing to leverage natural advantages.
Lynch's experience with the Fidelity Magellan Fund and his reputation as America's number one money manager.
The story of a seventh-grade class that successfully picked stocks by understanding the companies they invested in.
Lynch's decision to step back from managing funds to focus on family, charity work, and sharing his investment wisdom.
The impact of Lynch's investment philosophy on individual investors and the importance of a hands-on approach to charity work.
Transcripts
people don't understand their natural
advantages and they don't use it that's
bad number one but worse number two if
you don't think you're a good ice skater
or if you're convinced you're not a good
cellist you're not going to try it but
people are buying stocks anyway they're
not discouraged they just think it's a
gamble yeah we begin with peter lynch
time magazine has called him america's
number one money manager during the 13
years he headed the fidelity magellan
fund it was a top-ranked general equity
mutual fund his new book beating the
street offers advice on picking stocks
and maximizing profits and he's here to
talk to us about a lot of things welcome
to the broadcast you wrote a book called
one up on wall street and i think that's
one of the best-selling books ever about
wall street if i'm not correct you can
correct me
so why then did you write another okay
okay i think the reason i wrote it is
the first i try to explain to people
their great advantages their edges they
have
and that they should get involved in
stocks right and they should do it on
the right basis on the first book right
yeah and obviously i didn't make a great
impression because the percent of
people's assets
involved in stocks has gone down in 1960
people had 40 of their financial assets
including their house in stocks and
mutual funds in 80 that was down to 25
it's now down to 17 and why do you think
that is well i think people in the
decade of the 80s was the best decade
this century for stocks i think people
managed to lose money in the 80s doing
it themselves because their methods were
so flawed so i i really feel as though i
wanted people to understand i don't want
anybody to buy a stock i'm saying if
you're going to buy a stock you should
do certain things right if you're not
willing to do these things you should
leave your money in the bank your
philosophy is simple and i'm remembering
this from the previous book i think
we're now talking about the previous
book correct your philosophy was if you
find something that you identify with i
remember that was the story of your wife
and her hose yeah your wife kept all the
legs
oh you got it legs and panties your wife
said these are the greatest things i've
ever seen right and when your wife said
that you knew that this was a product
that was better right you used to stay
at la quinta motel right the service was
better whatever was better the price is
good and the price was good too and you
said this is a place that i can
determine i peter lynch can tell that
this is a good product right if these
people are making a good product then
their earnings are going to go up
therefore the stock's going to go up
right and that's the kind of
decision-making process you ought to go
through right do i have it you've got it
exactly right well i do i don't think
people understand there's a 100
correlation
with what happens to a company's
earnings over several years
and what happens to the stock if the
company mcdonald's has done very well as
a company right the stock has done very
well people worry about
too much money supply what's happened
the price of oil who's the president
who's being nominated for the supreme
court it's the ozone layer there's
nothing to do mcdonald's earnings go up
the next 10 years the stock will go but
what they will say to you peter is that
as you know and why am i telling you
this but it's fun to tell you this
they're telling you that these other
things influence the amount of earnings
of a particular company if we're in a
recession people are not going to spend
as much money on going to the movies or
whatever they do right and and therefore
you got to pay attention to these other
things because they impact on earth they
are very important but you have no idea
of knowing what they're going to do alan
greenspan is the head of the federal
reserve right he cannot predict interest
rates yes he'd be the first to influence
but he can't predict them he cannot
predict what long-term interest rates
are going to be one year from now two
years from now three years he's even
surprised how low they are now right so
how am i supposed to pick interest rates
how am i supposed to predict the economy
you certainly remember the recession of
82 yes 1982 with a 20 prime rate 14
unemployment 12 percent inflation i
don't remember anybody telling me in
1980 or 81 that was going to happen all
of a sudden we had the worst recession
since the depression i didn't read about
in the paper so it's crazy to think
about these things
here's a quote from you i own dunkin
donuts when you own dunkin donuts you
don't have to worry about korean imports
you don't have to worry about m2 or m3
these are money supply figures
and what's happening to the money supply
this is the way you make money if you
don't understand what the company does
you should not be in it if you could
predict the stock market you could
predict the economy you could predict
interest rates if you go buy the wrong
stocks you're going to lose have your
money anyway right i'm saying people
have natural advantages yeah let's say
what you do for a living is you're
involved in the restaurant industry
right you supply paper products you
supply kitchen equipment you help build
restaurants
you saw mcdonald's you saw chichi you
saw chili's you saw cracker barrel you
saw dunkin donuts kentucky fried chicken
taco bell these are all these stories
these were 40 40 fold you made 40 or 50
times your money you don't need to make
that kind of money many times your life
right
that's all you had to do was follow the
restaurant industry people are in
industries they're in the publishing
industry they're in the chemical
industry the paper why don't they just
stay within industry you only need a few
stocks a decade how many good stocks you
need a lifetime instead of people
they're in the restaurant industry
they're buying biotechnology stocks the
people in the camp
the people in the chemical industry are
buying oil stocks it's absolutely absurd
people don't understand their natural
advantages and they don't use them so
that's that's bad number one but worse
number two
if you don't think you're a good ice
skater or if you're convinced you're not
a good cellist you're not going to try
it but people are buying stocks anyway
they're not discouraged they just think
it's a gamble yeah so therefore they go
forward and they they bet on one stock
for a week and a half and it goes up and
they make two dolls on it then they sell
it they buy something else when three
years is over all they've done is
generate a lot of commissions they've
probably lost money that's a mistake so
your advice is what if you don't
understand a company if you can't
explain it to a 10 year old in two
minutes or less
yes don't own it because when it goes
down let's say the stock goes down too
you don't understand what's going on
what do you do do you buy more do you do
you do you flip a chances are your
broker doesn't either you they he or she
certainly doesn't know about it
i mean who knows what advance what all
these things are at auto back planes and
megaflops who knows what all this is so
buy what you know buy in your industry
buy what you know buy local people so so
suppose you you don't have an industry i
mean you know you don't really you what
you buy company local companies right
companies your own industry
ten years after walmart went public ten
years after walmart ten years after it
went public it's a 25 year old company
now right you could have bought the
stock and made 50 times your money on it
50 times this is if you bought it 10
years after it was public already it
already gone up five-fold so you could
have made 250-fold but i'm saying let's
say you were in a town they came into it
they said boy these prices are great
they're doing terrific i like the
bargains you checked it out you spent a
little bit of work on it yeah i mean
people are very careful when they buy a
dishwasher they do some research they'll
put ten thousand dollars in some stock
they're here on a bus so if you did a
little bit of research you say walmart's
only only ten percent in the country
they're not even saturated there why
can't they go to the rest of the country
so is this this is more of the same is
this it's more of the same plus
i show examples it's it's a touch more
detailed it actually shows me in an
action right i picked 21 stocks early in
1992.
some work some don't i follow those
companies some of the companies the
fundamentals deteriorate some they
improve i watch those companies go
through the year i also explain the
retail industry i try and make it very
simple i talk about a wonderful example
is a seventh grade class yeah the
teacher of that read my book and my
first book that you were talking about
you you and i did a show on that in
washington you remember that show this
is a long time ago
she read the book and i said if you made
it through fifth grade math
you can do it in the stock market she
says okay she started teaching it in
seventh grade seventh grade class these
kids had to study companies they had to
look at their balance sheets to see if
they're solving and they pick stocks
these stocks were up 69 percent over two
years when the market was up only 20.
they picked stocks like limited they
picked the gap they picked walt they
understood these companies they also
picked ibm i lost money on that too yeah
i mean everybody makes mistakes but it
did yeah but i'm saying this is this was
this was the school saint agnes school
in arlington mass but in addition
in the decade of the 80s there's 8 000
investment clubs these are amateurs sort
of right average people just investing
these investment clubs 62 of them these
clubs beat the market in the decade of
the 80s only 25 percent of professionals
beat the market let me go back to one
other subject you after you're coming
back to fidelity aren't you just i'm not
gonna do something when i when i finish
this book i've been working about one or
two days a week the last year and a half
on this book right now i'm done with the
book i'm going to go back to maybe one
day a week working with the younger
analysts just listening to them talking
to them i'm not telling them to buy zero
zero lifestyle not totally i'm not gonna
run another fund 13 years is plenty of
running a fund i'm just going to work
with younger analysts let them ask
questions i'll ask them questions it's
going to be a lot of fun now do you
still follow do you manage any money for
anybody other than yourself no no
i manage money with other people for
some charities right but no i don't
manage anybody's accounts you're not
doing some mutual funds
no it's nothing i'm out of it cold
turkey all right you called turkey cold
turkey
are you happy you did this i'm obviously
delighted it's been and you like your
new life oh it's fabulous four or five
years ago you just said and i'm managing
all this money i'm gonna do i'm gonna
quit yep that's right and what and you
went to do what well actually i want to
spend more time my wife and my children
right and it was an interesting
situation because i loved my job i
adored my job
and i and i liked outside activities and
when i was young
you know
i didn't wasn't involved in charity work
until i was 30. no activities younger
children you just read them a book and a
good night moon and they fall asleep but
it's all over
when they get older there's more time
involved so i enjoyed the family i was
leaving for work at six in the morning i
was getting home at seven o'clock at
night six days a week i was in boston
yeah traveling 14 days a month it was
just too much so i said
you know i i said that's it i can't take
it and fortunately i'd made enough money
to say
i could give up the jobs i didn't have
to give up the family or the outside
activities and so what happened then so
you did what with your well i cut back
from about a 80 a 90 hour a week to a 40
or 50 hour week and i in the morning i
make breakfasts and lunches for the kids
and i do the spelling words and the
spanish words carolyn does the math and
the science and i uh see carol in the
morning and off i go to a place you have
to go to my opinion you have to go
somewhere to do something if you stay at
home you want to be answering the
telephone or watching cartoons so yeah
it's like falling asleep taking a nap so
she does the hard work and i go i go
finally gave me an office i have a
secretary and i spend majority of the
time working on charity things like
inner city schools inner city libraries
inner city housing you know helping
people manage their money or no not at
all
just i'm some of the charities i'm on
the investment committee of some of the
museum of fine arts the you know i'm
involved in national hospital
boston college but united way but
all the extra things i added to were
real
hands-on
actually being involved in charitable
activities
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